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Written submission to the European Parliament on “Strategic Reforms of the IMF” The IMF and
World Bank in the 21st Century: David Woodward, New Economics Foundation, London 9 May 2005 The current international financial system, as it affects developing countries, is based heavily on the IMF and the World Bank. Their roles have been inseparable since their inception at the Bretton Woods Conference in 1944 – and have become still more closely linked since the Bank’s introduction of structural adjustment lending in 1979 and the Fund’s introduction of the Structural Adjustment Facility in 1986. This makes it difficult to consider proposals for one in isolation from the other. In view of the commonality of other important aspects – such as governance structures – between the two institutions, this note therefore considers both. 1. The Need for Change (a) IMF and World Bank Functions In principle, the IMF exists to ensure the financial stability of the global economy, and the World Bank primarily to provide a mechanism for the transfer of resources to countries and regions in need of additional resources for development. While the nature of the global economy – and therefore the nature of what is required in these areas – has changed fundamentally in the 60 years since the institutions were founded, they have not adapted commensurately. The result has been a serious mismatch between the needs of the global economy and the activities of the two institutions, and thus a serious failure to perform their intended purposes. The IMF was designed to provide occasional and strictly temporary financial support to individual (mainly developed) member countries, in support of macroeconomic policies designed by the government concerned to deal with a short-term balance of payments problem arising from country-specific factors, within the framework of an international system based on fixed exchange rates and restrictions on capital movements between countries. However, most countries now have floating exchange rates; and capital movements have largely been liberalised, and are now considerably larger in scale at least partly as a result. Over the last 25 years, serious financial instability has arisen primarily in developing countries, while developed countries have been able to resolve their financial problems without recourse to IMF lending. Moreover, balance of payments crises have been general rather than country-specific, arising from trends in the global economy and affecting entire regions and/or categories of countries; and they have either been chronic in nature (eg the debt crisis, which is continuing after more than 20 years), or have arisen from types of capital flows unthought of when the Fund was established (as in the case of the Mexican crisis of 1994 and the Asian and other crises of 1997-2000). Partly as a result of these
factors, the IMF’s role in dealing with balance of payments problems in the
last 25 years has proved wholly inadequate or inappropriate. Efforts to deal
with the low-income countries’ debt crisis have been totally ineffective, if
not counterproductive, despite the debt reduction which has taken place. This
has been a result, partly of the collective effect of the widespread application
of policies (deflation and export promotion) which were designed to be applied
in isolation; and partly of the extension of the Fund’s role into structural
economic policies inappropriate to the countries to which they were applied. The
IMF’s response to the Asian crisis was also generally agreed to have been
inappropriate – largely because it represented an uncritical application of
policies designed for a wholly different type of crisis – and to have caused
unnecessary economic and social costs as a result. While this has been
recognised by the Coupled with its promotion of capital account liberalisation, which contributed substantially to the Asian crisis, it is therefore far from clear that the IMF is now making a positive rather than a negative overall contribution to international financial stability. The World Bank’s initial role was primarily to finance reconstruction projects, mostly in Europe, following World War II. It now lends exclusively to developing countries, and a substantial part of its lending is for policy reform rather than investment projects. While the Bank continues to channel resources from countries with less need to those with greater need, the North-South flow of resources provided by the current institutional arrangements is grossly inadequate. This is amply demonstrated by the persistence of appalling living conditions in many developing countries, particularly in Sub-Saharan Africa, the marked slowdown in the rate of social progress (eg in poverty reduction and infant mortality rates) over the last 20 years, and the continuing increase in poverty in Sub-Saharan Africa. Resource flows to low-income countries currently depend heavily on the willingness of developed countries to provide aid. While donors made a commitment to provide 0.7% of their national income in aid in 1970, only a handful have ever done so, and total aid is currently only one-third of this level. The annual shortfall is $130bn and the present value of the cumulative shortfall since 1970 is more than $4,000bn. If one-third of this had gone to Sub-Saharan Africa (excluding South Africa) – the region’s share of OECD countries’ aid in 2003 – the additional amount would be equivalent to 20% of the regions total income annually, or 6 years’ income cumulatively. The overall inadequacy of aid is compounded by its misallocation (one-third of total bilateral aid going to middle-income countries, largely for political and/or commercial reasons) and its terms (notably the tying of aid to particular suppliers). Over the last 15 years, a major element of the IMF and World Bank’s role has been as arbiters of debt reduction under the Highly-Indebted Poor Countries (HIPC) Initiative, concretising their previous central role in management of the debt crisis. This constitutes a clear conflict of interest, as they are both creditors in their own right and majority-controlled by another major group of creditors (developed country governments), while a single creditor (the US government) uniquely has a veto on major policy decisions, including those relating to debt policies. It is widely recognised that the debt reduction provided under the IMF and World Bank’s guidance has consistently been too little too late – although this owes more to the reluctance of some of the major bilateral creditors than to the Fund and Bank themselves. This has been a critical factor in the persistence of the debt crisis in low-income countries. (b) The IMF and World Bank and National Economic Policies While the Fund and Bank have failed to fulfil their intended functions of ensuring global financial stability and providing adequate resources for development, they have been diverted into a new role – that of directing economic policies in developing countries. In principle, the IMF lends to both developed and developing countries in case of need – but, as noted above, it has lent exclusively to developing countries for the last 25 years. Moreover the fundamental difference in the power relations between the IMF and developing country governments and its relationship with developed country governments makes the nature of its role radically different in the two contexts, transforming it from an emergency lender to developed countries into an arbiter of economic policy in developing countries. The latter role is enforced by the inadequacy and inappropriateness of North-South financial flows (and the associated debt and financial crises), which leave developing countries in a chronic state of balance of payments crisis. Moreover, the proliferation of debt and financial crises, their greatly increased scale relative to the Fund’s own resources, the cross-conditionality of other sources of financing on its programmes, and the domination of its decision-making by the developed countries (see below), mean that it is not only directing economic policies in most of its developing country members, but effectively directing them on behalf of the developed countries. Thus its basic principle has, de facto, changed from mutual support between its members to being a mechanism of control by a powerful minority over the powerless majority. The World Bank also exerts considerable influence over or control of economic and social policy in recipient countries. Not only is a substantial part of its lending directly conditional on specific policies, but the overall level of lending to each member country (including traditional project lending) is also based to a considerable extent on the country’s overall policy stance through the Bank’s Country Policy and Institutional Assessment criteria. In both cases, compliance with IMF conditions is a major consideration. This has resulted in a major shift in the locus of power in developing countries from the countries themselves to Washington – a trend intensified by the extension of the policies promoted by the IMF and World Bank from a relatively narrow macroeconomic domain into an ever broader range of structural economic and social areas. By seriously limiting the choices available to governments, this risks undermining and discrediting democracy where it exists and limiting its benefits where it is introduced, and may arguably discourage those motivated primarily by the public good from entering domestic politics. The perception of such outside control led to the Fund and Bank making their engagement with policy-making less direct through the shift to “Poverty Reduction Strategy Papers” (PRSPs), which were to be developed through a country-led process of consultation with civil society. However, the role of the Fund and Bank remains considerable: the macroeconomic parameters for policy are still set by the Fund, while other areas are guided by the Bank’s PRSP Source Book, which embodies broadly the same policies as formed the basis of structural adjustment lending. Moreover, the consultation process has in most cases been largely tokenistic, civil society participation is often selective, and constitutional (eg Parliamentary) structures are sidelined, again with potentially negative implications for democratic systems. Serious criticisms have also been levelled against the actual policies promoted – nowhere more so than in Sub-Saharan Africa – as being economically ineffective and socially harmful, since the publication of UNICEF’s Adjustment with a Human Face in 1987. While the Bank, in particular, has regularly produced studies to defend the record of the policies it promotes in terms of economic and/or social impacts, these studies have generally been more robust in tone than in methodology. The Bank’s initial defence – that the adjustment policies of the 1980s were causing temporary negative effects which would be more than off-set by longer term benefits – must now be regarded as discredited: a quarter of a century since the start of structural adjustment, poverty rates in Sub-Saharan Africa (according to the Bank’s own $1 or $2 criterion) have increased more quickly since 1993 than they did in the “lost decade for development” of the 1980s, and more quickly in the last period for which data are available (1999-2001) than at any time since 1984. (c) IMF and World Bank Governance Structures The IMF and World Bank’s governance structures are based on a system of weighted voting, each country’s vote being weighted (directly or indirectly) in accordance with the size of its economy[1]. This skews the voting heavily in favour of developed countries and against the developing countries – particularly the poorest. As a result, while the effects of Fund and Bank policies and activities have much greater effects on developing countries than they do on developed countries (see above), the developed countries, who have less than 14% of the world population, have a substantial overall majority of the votes in the IMF (60.4%), the IBRD (57.0%) and IDA (60.1%)[2]. The whole of Sub-Saharan Africa has fewer votes in the IMF (4.61%) than France (4.96%), the UK (4.96%), Germany (6.01%) or Japan (6.15%), and less than one-third as many as the US (17.14%). Ethiopia, with a population of 67.2m has 0.18% of the votes in IDA, well below Iceland (0.23%), which has just 284,000 people. In the IBRD, Nigeria, with 132.8m people, has fewer votes than Denmark, with 5.4 million. In the Executive Boards, while five developed countries have their own Directors in both institutions, some developing countries are further disenfranchised by a constituency system in which an Executive Director casts the votes of all the countries he or she represents as a single block. Thus the Commonwealth Caribbean countries find themselves represented in both the IMF and the World Bank by a Canadian Director in a constituency overwhelmingly dominated by Canada and Ireland, while Kazakhstan, Belarus and Turkey are represented by a Belgian Director in a constituency dominated by EU members. In the World Bank, seven constituencies include both developed and developing countries – all of which currently have Executive Directors from developed countries (Belgium, Spain, Netherlands, Canada, Italy, New Zealand and Switzerland). As a result, only 9 of the Bank’s 24 Executive Directors are from countries eligible to borrow from the Bank. By convention, the President of the World Bank is nominated by the US, and the Managing Director of the IMF its Western European members. While the EU has on occasions succumbed to pressure from other members to withdraw its IMF nomination, the US has never done so in the World Bank. Even when this does happen, the US or EU alone still nominates another candidate. There is no established process for scrutinising the nominee. The lack of democracy, transparency and accountability of this process was highlighted by the recent highly controversial (but nonetheless unopposed) appointment of US Deputy Defence Secretary Paul Wolfowitz as World Bank President. Despite widespread opposition among those professionally engaged in development – not least development NGOs, some 1,600 of whom signed a petition against the nomination – and the staff of the World Bank itself, Wolfowitz was unanimously elected following a single meeting of the Executive Board, whose proceedings are confidential, just 15 days after his nomination by George Bush. This is in marked contrast with Bush’s nomination of John Bolton as US Ambassador to the UN a week before, which required an extensive process of Congressional scrutiny, in public, which has so far lasted more than two months, with the appointment still uncertain. The Fund and Bank’s anachronistic system of governance again largely represents a failure to adapt to changes over the last 60 years. While it may have been acceptable when the Fund and the Bank were founded in 1944, this was a time when much of the developing world remained under colonial rule. By contemporary standards, it is clearly contrary to accepted democratic principles – and would surely not be compatible with the Bank and Fund’s own standards of good governance if replicated in a developing country. 2. Towards an Alternative Thus neither the IMF nor the World Bank is serving its intended purpose. Rather, they have become, effectively, mechanisms through which the developed countries exercise a considerable degree of control over the governments of developing countries, to the detriment of their economies, their people, and arguably their governance. This results from fundamental shortcomings in the institutions’ governance structures, their failure to adapt their roles to a radically different context from that for which they were established, and the inappropriate adoption of a proactive stance to promote an ideologically driven policy agenda. These are fundamental problems, which go far beyond a piecemeal reform of the existing institutions. As the transition of the GATT to the WTO amply demonstrates, institutional inertia in practice represents a serious constraint to the possibility of even radical organisational changes generating equivalent changes in the operation of the institutions concerned – and the failure of the Fund and the Bank even to achieve the necessary incremental changes to maintain their relevance and usefulness in a changing world offers little encouragement. We therefore need to go back to the functions which need to be performed, and to consider how this can best be done in the contemporary context and possible future scenarios. (a) North-South Financial Transfers It is clear that the current voluntarist approach to North-South financial transfers has failed, despite an explicit commitment by donors to provide a given level of funding. It has failed to generate more than a fraction of the resources committed; and the resources which have been provided have been misallocated and abused to exert undue influence over the economic policies of sovereign countries – in some cases in clear contravention of the wishes of the population as expressed through democratic elections – and, for example, on recipient governments’ positions in international negotiations. This indicates a need to move from a system based on voluntarism to one based on rights and obligations. This could be done, for example, through the application of taxes at the global level on transactions which either cannot readily be taxed at the country level (eg a currency transactions tax), where tax competition makes unilateral taxation unviable (eg taxation of aviation fuel) or to correct global externalities (eg taxes on carbon emissions and natural resource depletion). If necessary, such taxes could be supplemented by voluntary contributions. The designation of taxes, their terms, and the allocation of the resources raised would need to be decided through a governance structure which conformed to generally accepted democratic principles – particularly that representation and voting strength should be based only on population size (though with an agreed mechanism to ensure adequate representation for smaller countries). Representatives should be accountable to their constituents through existing democratic institutions (or through parallel democratic structures where the political system is not democratic); and the organisation’s deliberations should be transparent, allowing civil society to make an input to decisions before they are taken. The allocation of the resources generated between countries should be based primarily on need, and should not be conditional or otherwise dependent on national policies, or tied to the purchase of goods or services from a particular country. Representative governments should be able to allocate resources according to nationally-established priorities. (b) Dealing with Debt Crises – a Fair and Transparent Arbitration Process There needs to be an institutional arrangement (though not necessarily a standing institution) for future debt crises which is independent of both debtors and creditors. The mechanism could be triggered either by a debtor country filing for a standstill on its debt payments, on the grounds that they can only be met at the expense of the social and economic rights of its population; or by the country’s creditors to declaring it insolvent on the grounds of persistent non-payment. The creditors and the debtor country would then each appoint a representative to an arbitration panel, these two representatives then agreeing on a mutually acceptable third member. The role of the panel would be to establish the legality of any debts where this is in dispute, and to designate a debt work-out based on the human development approach to debt reduction or a variant of it. It would be required to operate both independently and transparently to creditors and the population of the debtor country, this being ensured by oversight by the United Nations. It would also be open to submissions from civil society groups in the debtor country. Resolving the current debt crisis is an immediate priority, and cannot wait for the establishment of a new institutional framework. This requires the immediate cancellation of the remaining debts of the HIPC countries, and a review of the debts of other low-income countries, again on the basis of the human development approach to debt reduction. The costs should be borne by the creditors themselves, in recognition of their co-responsibility for debt problems and the enormous economic and social cost already imposed on debtor countries by their failure to deal with the crisis expeditiously. Cancellation of IMF and World Bank debts should be met as far as possible from their own resources – that is, by the sale or revaluation of IMF gold and by drawing on the Bank’s reserves. (c) Avoiding and Resolving Other Future Financial Crises The response to the Asian and other financial crises of the late 1990s was a spectacular failure. This is a reflection, not only of the inappropriateness of the policies prescribed by the Fund as a condition for its support (which has attracted greatest attention) but also of the form of the IMF response itself, which was designed for an entirely different type of crisis. Requiring the negotiation of a policy programme before financial support is provided is clearly not an appropriate or effective mechanism to deal with a crisis arising from volatile capital flows, which results in a much faster and more immediate financial outflow than a conventional debt crisis. The emphasis therefore needs to be on prevention of such crises and automaticity of response. This could be achieved by the use of a global intervention fund (formed, for example, by the pooling of a set percentage of the reserves of all countries with convertible currencies) in support of a system of crawling peg exchange rates. Sustained downward pressure on a particular currency would be demonstrated by the scale of intervention required in support of the currency concerned, which would trigger an accelerated rate of depreciation within the crawling peg system, to be agreed with the intervention fund. As well as averting Asian-style financial crises, this would allow exchange rates to be stable and predictable, while leaving countries able to use them as a policy instrument, within market constraints, and averting the need for external intervention in other economic policies. This system could be further strengthened by the appropriate use of capital controls. (d) Policy Advice, Support and Coordination While the IMF and World Bank’s activities in promoting particular economic policies have on the whole been unhelpful, some developing countries (not least in Sub-Saharan Africa) are likely to have a continuing need for policy advice and capacity-building for policy design. However, it is essential that such activities should be impartial and pragmatic rather than ideological; that they should be decided nationally rather than externally imposed; and that they should be geared to the achievement of (nationally established) social objectives within economic constraints rather than focusing on macroeconomic objectives as ends in themselves. This would be greatly assisted by developing country governments themselves selecting those giving them policy advice and paying them directly from the resources they received from global taxation, rather than relying on donor agencies to provide advice directly, by placing their employees in senior positions in ministries, or through consultants financed from aid budgets as “technical assistance”. Where there is a need for a more proactive role for a supranational body is in the coordination of policies which have potential adverse effects on other countries. Particular instances include:
The objective of such coordination would be to ensure that the collective effect of developing countries’ economic policies in relevant areas was conducive to their collective interests – that is, to ensure their collective action in their collective interest. (This is in marked contrast with the roles of the IMF and the World Bank, which have actively promoted counterproductive policies in all the areas listed above.) Such coordination should therefore take place through a body whose membership is limited to developing countries, operating in a democratic, accountable and transparent way. Such a body could also potentially have broader benefits, for example acting as a forum in which developing countries as a whole could develop common positions in international trade organizations. 3. Conclusion The IMF and World Bank have singularly failed to perform their core functions, and the developing countries have suffered considerably as a result. This failure reflects their inability to adapt to a changing global economic environment, or even the changes in governance standards associated with the passing of the colonial era. The suggestions above are intended to offer some initial ideas as to how these functions could be better performed through an alternative institutional structure. The critical need is to remove the IMF and the World Bank decisively from the policy-making process in developing countries, where their activities have been damaging economically, socially and politically; and to institute more effective mechanisms to prevent and resolve debt and financial crises at a lower social cost. There may be some residual functions which could usefully be done by a much smaller (and probably merged) IMF and World Bank in such a scenario. These include policy review (such as the IMF’s Article IV Consultation process), data collection and dissemination, and possibly some analysis. Even with such a reduced role, however, it would be essential to ensure that the organizations’ governance structures were democratized, and their approach non-ideological, particularly in policy-related analysis. Further information on the proposals in this note are contained in the following publications. Currency Transactions Tax Andrew Simms (2001) “The Robin Hood Tax”. New Economics Foundation/Tobin Tax Network, www.tobintax.org.uk/download.php?id=161 Sony Kapoor (2004) “The Currency Transaction Tax: Enhancing Financial Stability and Financing Development”. Draft, Tobin Tax Network, http://www.waronwant.org/?lid=9100& cc=1 Fair and Transparent Arbitration Process (FTAP) Ann Pettifor (2002) “Chapter 9/11: Resolving International Debt Crises – the Jubilee Framework for International Insolvency”. Jubilee Research, New Economics Foundation, www.jubileeplus.org/analysis/reports/jubilee_framework.pdf Human Development Approach to Debt Reduction Henry Northover, Karen Joyner and David Woodward (1998) “A Human Development Approach to Debt Reduction for the World’s Poor”. CAFOD, http://www.csae.ox.ac.uk/conferences/1999-cpa/Papers/SessionA/Northover.PDF Henry Northover (2001) " A Human Development Approach to Debt Relief for the World's Poor: Update on Working paper 1998 Northover, Joyner, Woodward”. CAFOD, http://www.cafod.org.uk/archive/policy/acaf1.shtml Ann Pettifor and Romilly Greenhill (2002) “Debt Relief and the Millennium Development Goals”. Backgrund Paper, Human Development Report 2003, UNDP. http://hdr.undp.org/docs/publications/background_papers/2003/HDR2003_Pettifor_Greenhill.pdf Immediate Debt Cancellation Sony Kapoor (2004) “Resource Rich BWIs, 100% Debt Cancellation and the MDGs”. Tobin Tax Network/Jubilee Research, New Economics Foundation. www.jubileeplus.org/latest/mdgpaper.pdf Coordinated Intervention David Woodward (1999) “Time to Change the Prescription”. Catholic Institute for International Relations. (Can be ordered from http://www.amazon.co.uk/exec/obidos/ASIN/1852872233/qid%3D1102936658/202-1041039-5267804) [1] This link is explicit in the IMF. IBRD shareholdings are based in part on IMF quotas, and IDA subscriptions on IBRD shareholdings. [2] IDA is the branch of the World Bank which lends only to low-income countries at concessional interest rates. The IBRD is the branch which lends at commercial rates, mostly to middle-income countries. |
